January 24, 2012

I.M.F. Reduces Estimates for Global Growth
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By ANNIE LOWREY



WASHINGTON — The International Monetary Fund warned on Tuesday that global growth prospects had dimmed as the sovereign debt crisis in the euro zone entered a “perilous new phase.”


Releasing quarterly updates of three reports on the outlooks for the economy, debt and global financial stability, the fund cut its estimates of global growth this year to 3.25 percent, from the 4 percent it forecast in September, on “sharply escalated” risks emanating from Europe.


In light of that market uncertainty and sluggish growth, the fund is seeking to raise up to $500 billion in additional lending capacity. It is also calling on the European Union to expand its bailout fund to at least $1 trillion from its current capacity of 440 billion euros, or about $570 billion, according to a person with knowledge of the negotiations.


José Viñals, director of the I.M.F.’s monetary and capital markets department, told reporters that the fund sought to build a “global firewall” — both to help ease the euro crisis and to ensure that no bystanders to it find themselves locked out of the global financing markets.


In a speech in Berlin on Monday, Christine Lagarde, managing director of the fund, said: “The longer we wait, the worse it will get. The only solution is to move forward together.” She call on the world to help bolster the I.M.F.’s resources and on Europe to bolster its own. “The world must find the political will to do what it knows must be done.”


In its quarterly update, the fund said that “risks to stability have increased, despite various policy steps to contain the euro area debt crisis and banking problems.”


The I.M.F. cited continued high financing costs for European countries and weakness in European banks as two risks that had the capability to intensify each other and lead to “sizable contractions” in economic activity.


Other risks include investor fear over the debts of big countries like the United States and Japan, a “hard landing” in emerging economies and spiraling oil prices as the European bloc and the United States confront Iran.


The fund cut its growth forecasts for every region in the world, as well as for trade and commodity prices. The fund now estimates that Europe will experience a mild 0.1 percent contraction — down from a September forecast of 1.4 percent growth — with a sharper contraction of 0.5 percent among the 17 countries that use the euro currency and deeper recessions in Italy and Spain. It also cut its estimate of global trade volumes.


The I.M.F. did not change its growth forecast for the United States, however. Speaking with reporters, Olivier Blanchard, the fund’s chief economist, said that the “good and bad news” about the American economy were “more or less canceling each other out":


The country’s economic growth is now self-sustaining, but a Europe in recession and a slowdown in emerging-markets promise to weigh on the United States in 2012.


The fund also made a stark warning about the safety of the American financial system. The fund said that “potential spillovers” from the euro area crisis might “include direct exposures of U.S. banks to euro-area banks, or the sale of U.S. assets by European banks.”


In recent months, American regulators and policy makers have played down such risks, pointing to sharply reduced exposure to Europe among money-market funds and investment banks.


The I.M.F. also warned that the United States might turn to austerity budgeting too soon, imperiling its own recovery. Carlo Cottarelli, the director of the fiscal affairs department, cited such premature fiscal tightening as a “concrete risk.” He noted that the steep, automatic budget cuts put into place by Congress last year would lead to the biggest hit to spending in four decades. He called for a more “gradual decline in the deficit.”


The same advice applies to the rest of the world, the fund said. Mr. Cottarelli warned that “both too little and too much adjustment will be bad for growth. Both extremes will be bad for growth.” The main risk is that too many countries will cut their budgets too deeply, too soon, sapping demand from the still-weak global economy.


Mr. Viñals, the director of the I.M.F.’s monetary and capital markets department, acknowledged that bond yields had declined in Europe in recent weeks. But he warned it “should not be taken for granted, as some sovereign debt markets remain under stress and bank funding markets are on life support by the European Central Bank.”


Banks should continue to deleverage, the fund said, adding that they should do so by raising funds, rather than reducing credit and thus hampering economic activity.